London Room Rental Costs Top £1,000 a Month for the First Time

The cost of renting a room in London has surpassed £1,000 ($1,246) a month for the first time, underscoring a shortage of property available to rent that’s becoming another pinch point in the UK economy.

(Bloomberg) — The cost of renting a room in London has surpassed £1,000 ($1,246) a month for the first time, underscoring a shortage of property available to rent that’s becoming another pinch point in the UK economy.

Data compiled by SpareRoom, a website that matches people seeking roommates, shows the average rent for a single room in the capital rose 15% from a year ago to £1,013 in August. That’s twice the rate of inflation and 28% higher than the national average of £794.  

The highest mortgage rates in 15 years and ballooning house prices since the start of the pandemic have made it less profitable for landlords to rent out their properties, prompting many to sell up. Those higher borrowing costs are also making it more difficult for first time buyers to grab a rung on the property ladder, stranding them for longer in the rental market.

“The money people make from being a landlord isn’t what it was 10 years ago, 15 years ago, and people are looking to recoup those costs somehow,” said Matt Hutchinson, a director of SpareRoom. “Interest rates have shot up, and that is affecting their mortgages. But also just the margins for being a landlord have been eroded with various tax changes.” 

Bank of England Governor Andrew Bailey told members of Parliament on Wednesday that he’s concerned about the impact higher rates are having on the rental market and recognized that it affected the “lower household income bracket” the most. Even so, he said rate increases have been necessary to curb inflation.

Elisabeth Stheeman, who oversees financial policy at the Bank of England, said at the same hearing that she herself lives in a four-generational household because “for the youngsters it’s getting more and more difficult to find somewhere to live within the budget they can afford.”

The figures for London indicate the scale of the crisis in the rental market, which is becoming a constraint on the ability of companies to hire staff in the capital. 

SpareRoom said the number of people searching for rooms in London far outstrips the supply. August’s figure was 20,000 higher than in the same month in 2019, while the number of rooms available is now 10,000 lower. 

This means there are currently 5.7 people actively looking at each room available on the platform, down from a peak of 8.8 last September but still triple the pre-pandemic average.

“New York in particular is following a very similar pattern to London. The ratio of renters to rooms is rising — currently at 7.2 – but, like London, hasn’t hit the peak it did in September 2022,” Hutchinson said, noting the average rent there is $1,473 (£1,181). “Things appear more stable in Paris, where the ratio of renters to rooms has remained lower than either London or New York.”

Some property owners are converting flats into short term rental units marketed through platforms including Airbnb Inc. as a way of boosting income. 

Increased regulation and a reduction in the tax relief that once was available on mortgage payments is pushing more landlords into short-term lets. Those come at the expense of longer-term contracts with tenants, said to Nathan Emerson, chief executive officer at Propertymark, a professional group representing estate agents.

“People aren’t making a living out of renting out their properties, and people, have given up,” Hutchinson said. “They’re selling, and they’re moving out of the market.”

“We have had people moving into the short term lets and Airbnb space because they can then offset those interest charges against rental income,”  Emerson said. “It’s classed slightly differently” by tax authorities.

The number of homes in London listed on Airbnb jumped 10% in the second quarter compared to the previous quarter, according to data compiled by Inside Airbnb. 

First-time buyers are being hit the hardest by soaring rates, with mortgage repayments now accounting for more than 40% of take-home pay, compared with the long-term average of about 29%, according to Bloomberg Economics. This makes it difficult for young people to move out of rented accommodation and into their own homes.

Bailey suggested that policy makers may consider a pause for their quickest series of rate hikes in three decades, suggesting relief for mortgage costs. But that’s unlikely to reverse the current trends in the rental market.

“There is obviously always a lag, but will people start reducing the rent?” Emmerson said. “I don’t think that will happen.”

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